2017 lender drinks

Last week, we welcomed 60 RateSetters to our offices in London for our annual lender drinks. Thanks to all that braved the rainy weather that evening to attend!

The event started with CEO and founder Rhydian Lewis providing an update on recent developments and plans for the year ahead. Themes covered included:

Resilience, for example through the introduction of a Stabilisation Period if the Provision Fund were under severe stress, and robust corporate governance throughout the business.

Setting new standards in transparency, with the 4th Way P2P ratings and research agency noting that “RateSetter now offers top-tier disclosure”.

Performance, covering the forecast Provision Fund usage for previous years, and noting that for total lending to date, a Provision Fund surplus of over £4m is projected. In each and every year since launch, actual lender returns match expected lender returns as a result of the Provision Fund.

RateSetter’s strategy of diversifying lending across different types of borrower and channel. Within this we are focusing on channels that perform and discontinuing those that don’t.

Looking to the future:

We are establishing loans as a distinct asset class, with risk and reward characteristics that sit between cash and other assets such as property and equities – providing a welcome additional option for investors.

We are optimistic that we are close to gaining full regulatory authorisation which will open the way to launching a RateSetter ISA, and are encouraged that the process has been rigorous, thorough and positive.

We are focused on becoming a scale player, as at scale our efficient cost base will be effective. We believe that achieving greater scale will allow us to deliver more value to customers.

We understand that we need to deliver value to all our stakeholders – maintaining a healthy balance supports the sustainability of the overall ecosystem.

We then opened up to the floor for questions. Below we’ve summarised some of the things that came up.

Question: What is the biggest risk for the P2P industry in general?

Answer: The answer that’s usually given to this question is platform failure – that a platform goes out of business and shakes confidence in the industry. It’s interesting to note that we have already seen some platform failures, and they’ve actually been quite orderly. In addition, some models may prove to be unsustainable and we may see some morphing towards something that has been proved to work. I think that, as an industry, we’re mature enough to deal with these things.

I think that the biggest risk for RateSetter is that we do not get to scale. The economics of what we do really kick in once we get beyond a certain size, just like any business. We’re confident that we have what it takes to reach that scale though.

Question: The rate of growth has declined since the first few years. Why is that, and should investors be worried about it?

Answer: We have increased our lending volumes for every year since we’ve launched. In 2016 for example we lent about 30% more than in 2015. It’s normal for growth to slow – it’s naturally easier to double volumes from a small base than from a larger one.

It’s worth noting that we’ve gone through a period where all-out growth has not been the key focus: we’ve been working hard on bedding in regulatory requirements, and focusing on channels of business that we think are good quality and sustainable. As a result, we are in a much stronger position for future growth.

Our model is sustainable: we’re increasingly able to attract really good borrowers at a sensible margin and offer lenders, let’s say, twice the interest available from a savings account (reflecting that P2P investments carry risk and do not purport to offer a guarantee) and it’s becoming clear how the economics of our model stack up.

Question: Do you hope to sell the business to a bank?

Answer: No, and we don’t think that banks would necessarily consider buying a major P2P business at present. We hope to list the business – as an investor brand, we this would be natural step – but this is some way away.

Question: For business lending, it seems that personal guarantees aren’t always reliable. Why aren’t you taking tangible security on more loans?

Answer: We take a physical asset where we can, but I think that personal guarantees do work at the smaller end of business lending. I expect that more and more of our loans will be secured in future as we scale up and do more asset finance.

Question: When you launch your ISA, isn’t there a risk that a lot of money will flood in, pushing rates down?

Answer: The short answer is that yes, in general an increase in the supply of money on our platform would cause interest rates to fall. However, we have built up strong origination channels so that we can increase our lending - we expect to be able to increase our lending volumes quickly through channels that we have identified for growth.

Question: Does RateSetter plan to move towards a higher level of institutional investment?

Answer: No, we remain committed to focusing on retail investment – currently well over 90% of lending is by individual investors. We think it makes good business sense to have lots of investors.